NJ: 201.445.8711     NY: 516.305.1996

IRS cuts penalties; but don’t forget the forms

For the past several years, as we have struggled with this depressed economy, the kinder, gentler IRS has released announcement after announcement about ways they are trying to help taxpayers. The latest announcement came last week, all about IRS’s latest installment in their so-called Fresh Start initiative. There’s lots of good news for taxpayers who don’t have enough money to pay their tax balance on April 17.

What the announcement doesn’t make clear is that to get these benefits, you must a file a new form on or before April 17. The new form is Form 1127A.

What does this form get you?

  1. An extension of time pay taxes for 2011. You get until Oct. 15, 2012. That’s a unique benefit. For years, it’s been hammered into our minds that the normal extension, Form 4868, is only an extension of time to file your tax return — not to pay your taxes. Note: If you do not pay your 2011 taxes in full by Oct. 15, 2012, all your penalties on the unpaid balance will be reinstated from April 17, as if you had never filed this form.

  2. A 6-month waiver of the IRS failure to pay penalty, from April 17 to Oct. 15, 2012. Normally, that penalty is ½ of 1% (.005) per month until it reaches 25%. That means, if you pay your 2011 taxes on Oct. 15, 2012, you will save 3% in penalties. If you owe $5,000, 3% savings is worth $150.

What does this form not get you?

  1. It does not get you an extension of time to file your tax return. You still need to file Form 4868. If you don’t remember to file for your extension, you will be subject to the late filing penalty of 5% per month, until it reaches 25%.

  2. It does not give you a waiver of the interest on your unpaid balance. The current interest rate is 3% per year. Much cheaper than credit cards.

Who is entitled to this Fresh Start protection?

Not everyone. The penalty relief will be available to two categories of taxpayers:

  • Wage earners who have been unemployed at least 30 consecutive days during 2011 or in 2012 up to the April 17 deadline for filing a federal tax return this year.

  • Self-employed individuals who experienced a 25 percent or greater reduction in business income in 2011 due to the economy.

And there are limitations on income and balance due. A taxpayer’s income must not exceed $200,000 if he or she files as married filing jointly or not exceed $100,000 if he or she files as single or head of household. This penalty relief is also restricted to taxpayers whose calendar year 2011 balance due does not exceed $50,000.

What if you know that you absolutely will not be able to pay the balance due by the October deadline? Is there any hope? Yes.

You can get an installment agreement more easily than before. The IRS has raised the threshold for automatic approval on installment agreements to $50,000 (from $25,000). You now have 72 months to pay your balance in full, including interest and penalties (instead of 60 months). Though you will have to submit a financial statement on Form 433-A or 433-F (the shorter version), to qualify.

You can use the online payment agreement application and get instant confirmation. Or you can mail Form 9465 to the appropriate IRS office. Note: There are fees for these installment agreements. $105 is the base fee for folks paying by cash, check or payroll withdrawal. The fee is reduced to $52 if you agree to have the funds withdrawn automatically from your bank account. If you qualify as a low-income taxpayer based on the data on Form 13844, you can get a reduced fee of $43